People's Republic of China

Promoting a Fair and Sustainable Welfare System in China

Remarks by Angel Gurría, OECD Secretary-General, delivered at the Forum of the China Development Forum Foundation

Beijing, 23 March 2014

(As prepared for delivery)

Ladies and Gentlemen:

It is great to be at the China Development Forum .

We are going through challenging times, marked by widening inequalities, population ageing and labour market uncertainties. These challenges need to be addressed, in large part, through fairer and more sustainable welfare systems.

Challenges to Welfare Systems in OECD countries

China’s welfare challenges are not unique. Welfare systems are under threat in many OECD countries. Population ageing is expected to put a strain on government budgets in the years to come. According to our projections, health care and pension spending will rise from 13.9% in 2007 to approximately 20-24% by 2060. In a slightly shorter period to 2050, the working age population in half of OECD member countries will decline by close to 30%, thereby making the financing of social protection more difficult in these countries.

Progress in China

China is currently strengthening its social safety nets and creating a modern welfare state. A minimum income standard is in place for all residents, and nearly everyone benefits from at least some measure of health insurance. A growing number of companies are doing their part by enrolling their workers in government programmes that grant industrial injury benefits, maternity leave and unemployment benefits.

China has come a long way in a very short time. Consistent with ongoing efforts, public social spending rose to 9% of GDP in 2012, against 6% in 2007. Though this level of spending is still considerably lower than the OECD average of 22% of GDP, progress has undoubtedly been impressive.

Going forward, further reforms are needed to meet the demands of an increasingly urban population. For example:

- The current distinctions between migrant and local workers in cities need to end; welfare reform access and the struggle for greater equality will be won – or lost – in the cities.

- The portability of pensions should be enhanced: China’s modern public transport network makes mobility easier, but unfortunately the pension system is still stuck in a world of zero mobility;

- As the economy rebalances, better opportunities for making successful transitions between jobs are needed, as small landholdings can no longer be a safety net;

- Finally, more can be done to provide better quality and universal health care.

Useful lessons from the OECDs experience

One of the key missions of the OECD is to identify best practices so countries can learn from each other’s experiences. We can offer China three useful lessons from OECD countries as you address your own challenges.

A first lesson is that governments should pursue a pension system that is simultaneously universal and sustainable. Most OECD countries have provided a universal system for over 50 years, but some have ignored the rural sector or have not ensured good coverage of the pension system in urban areas. They are now facing problems with old-age poverty.

Making sure that the systems are sustainable requires aligning the retirement age of women with that of men and increasing retirement age to 67 or 68. Some OECD countries have recently implemented reforms to this end. In China, our analysis shows that these measures could raise employment in cities by 6%.

The second lesson is that welfare needs to be more cost-effective. In the health sector, for example, 80% of outlays in OECD countries are provided through taxation or social contributions that can be reduced by reforms. In the last decade, governments have invested in the promotion of healthy lifestyles and the prevention of chronic diseases.

It should be possible for China to generate funds to expand its system, without raising taxes, by implementing reforms such as moving primary care out of hospitals and delinking doctors income from the drugs and examinations that they prescribe for patients.

A third lesson from OECD countries is that social protection should be seen as a form of investment. For example, when combined with training, unemployment benefits can help to better match people to jobs. Likewise, investing in kindergartens and childcare facilities can help boost female labour force participation and promote gender equality. Social protection does go hand-in-hand with economic progress and Inclusive Growth.

Ladies and gentlemen,

Most OECD countries have put in place modern welfare systems in response to citizens’ demands for quality services and social protection. They are now faced with several challenges, as their population ages and government budgets are stretched. They need to restore the financial sustainability of pension systems, reform labour market policies to combine effective protection for the jobless, and stem the increase in the costs of health care. A heavy legacy indeed.

China, by contrast, is only now building its welfare system, strengthening its social safety nets and improving the delivery of social services to the population. In doing so, you can learn from the experience of OECD countries, building on their achievements and avoiding their mistakes. They are expensive, wasteful and difficult to reform. We at the OECD are looking forward to continuing to work with you, to design, promote and implement better welfare policies for better lives.